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The Global Financial Crisis: What Happened, and will History Repeat Itself?

In an interview with the Financial Times Julia, owner of a small website design business, recounted how in 2006, she bought a house in Florida at the peak of the housing bubble. Although she had the financial capacity to purchase a larger house, she and her husband decided to play it safe and purchase a smaller one.

But her realtor, the bank, advisers, everyone in the business suggested purchasing a better house. Egging her on to take on more debt and spend more. Though with a household income of $270k, they were comfortable with their chosen house as it cost less than this annual income.

Two years later, in mid-2008, Julia recalled how people were suddenly no longer spending money on websites or design. “They'd get inexpensive pre-packaged websites and ask us to tweak them or get their amateur cousin to do it.” Demand had collapsed and the dramatic loss of income frightened her husband so much that he simply took the household’s money “and ran”.

Julia was left with two infants with no father, no business, a part-time nursing job and a mountain of debt. Soon the number of crime incidents in her neighbourhood skyrocketed and her house was robbed on multiple occasions. Julia’s story, although extreme, was unfortunately not very uncommon as it was precipitated by the global financial crisis.


The Cause, The Trigger and The Mechanism

The underlying cause of the GFC is simple, super low interest rates (after the Great Moderation) that led to money being extremely cheap. This money was driven even cheaper by the entry of 1 billion very low-paid Chinese workers and their savings into the global economy and led to ever higher valuations in almost all asset markets. (NOTE: A bubble is when assets typically trade at a price that greatly exceeds the asset's intrinsic value.)

The main trigger was the collapse of the US mortgage market which the Democrats essentially set as a ticking bomb in the 1990's when they made Fannie May and Freddie Mac (state-backed home mortgage companies) give mortgages to people who could not afford to pay these mortgages (i.e., they encouraged the creation of sub-prime mortgages); this was a populist policy designed to keep them in short-term power but had severe long-term consequences.

The mechanism of the collapse was financial deregulation that allowed banks to have ever worse risk management of positions (they could take on extremely large amounts of debt) and credit-rating agencies to have widespread fraudulent practices (they could simply lie about the level of risk associated with a security).

In particular, this deregulation led to a severe bubble in the market for mortgage-backed securities. (An MBS is essentially a package of mortgages, in theory by packaging mortgages together, the overall risk of default declines). Purchasers of MBS were financing themselves with cheap credit and they severely underestimated the risk of their assets’ default because credit-agencies gave false valuations, altogether this meant that MBS were being traded at a price far beyond their intrinsic value. When the housing market collapsed, the market for MBS collapsed too.

This crisis began in the USA, with the collapse of multiple banks notably including Lehman Brothers, and then had huge spill over effects to the financial markets of the rest of the world. It was the world’s first financial crisis that was global in nature, hence the moniker ‘The Global Financial Crisis’. Its consequences are outlined below.


The Economic and Social Consequences

The economic consequence of the GFC was that it caused a recession (defined as two consecutive quarters of negative economic growth) in high=income countries and posed a major slowdown for low/middle- income economies:

(orange lines show the duration of the GFC from mid-2007 to mid-2009).

A reduction in real GDP naturally meant that there was less demand for labour too. Even by 2012, the unemployment rate did not fall back to 2007 levels. This is unlike real GDP which recovered quite quickly.

The social consequences of the GFC were more prolonged, sometimes upending the lives of people such as Julia. The World Bank created this diagram on that explains how the financial crisis led to a series of social crises. It is part of their open knowledge programme:

Translating to Today

Could it happen again? The following statistics can support or negate this argument. We will find that while the causes of asset bubbles still exist, it is unlikely there will be major consequences due to new and better regulation.



NOTE: UK house price growth in 2021 was beyond the house price growth in 2007 (pre-GFC) bubble.




However, there is a large difference between 2008 and today. Surging asset prices pre-2008 were due to lax regulations causing bubbles in markets. Today, banks have strict regulations they must adhere to and credit rating agencies are now far more reliable – instead the rise in these asset prices is less due to speculation but can instead be attributed to their mechanical relation with the quantity of money which has doubled in the last two years.

Furthermore, even if it turns out that asset prices have been in a bubble which is about to pop (for example the stock market has declined significantly in the past couple months), it should not be a major concern. Regulatory measures such as, capital requirements and stress tests mean that (UK) banks can withstand considerable pressure.

But most importantly, the recession that forecasters are predicting for the UK economy is because they expect the Bank of England to raise interest rates in essence this means:

- Policymakers see that a recession coming

- Central Banks are in control of how severe this recession is

Which is a far cry from the near financial meltdown caused by the subprime mortgage crisis that forced Central Banks to adopt radical and unconventional policies to not just soften the recession but to prevent a depression because of the huge blow to consumer and business confidence.


To conclude, the economic consequences of a coming recession will be far less severe than 2008 because these are foreseen; the UK’s GDP would probably recover quite quickly as confidence is not that low. However, because the social transmission mechanisms are common between all recessions, whether the social consequences are just as bad depends to a large extent on whether the government chooses to cushion the blow in the face of this cost-of-living crisis and likely rise in unemployment – or decides to let the public to weather the storm. If that’s the case then Julia’s story may be repeated again.


References/Wider Reading

10 years on - have we recovered from the financial crisis? - Institute For Fiscal Studies - IFS

Weathering the financial crisis: how seven lives were changed (

Explainer: The Global Financial Crisis (

World Bank Document

Interest rates: What are they and how high could they go? - BBC News

Financial crisis 2008: A reporter's memories from the front lines | Financial Times (

The source of global trade imbalances | VOX, CEPR Policy Portal (

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